The Animal Spirits

Markets Don’t Just Reflect Reality—They Construct It

You can feel it, can't you? Something's not right. The crowd is dispersing. Moving to safer ground.

On Monday, the Nasdaq saw its worst day since September 2022, dropping 4%. The 30-stock Dow lost nearly 900 points. The S&P 500 has fallen 9.5% from its all-time high in February. Headlines speak of “recession fears,” “market uncertainty,” and investors being “cautious on growth.”

But what, exactly, has changed in the fundamental economic landscape? The employment report showed continued job growth. Inflation remains stable. Corporate earnings, while not spectacular, haven't collapsed. The economic data points don't paint a picture of imminent doom.

What's changed is the story we're telling ourselves.

John Maynard Keynes coined the term “animal spirits” to describe the emotional and psychological forces that drive human economic behavior beyond rational calculation. "Most, probably, of our decisions to do something positive," he wrote, “can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

What we're witnessing now is not merely a recalculation of economic probabilities but a shift in narrative, a transformation of the story that market participants tell themselves about where we are and where we're headed. And narratives, once they take hold, have the peculiar power to reshape the reality they purport to describe.

Consider Delta Air Lines, which slashed its earnings outlook due to “weaker U.S. demand” and “macroeconomic uncertainty.” This announcement sent the stock down 7% and pulled other travel-related stocks with it. But the interesting question is: what came first—the weakened demand or the narrative of weakened demand? When companies cite "uncertainty" as the reason for lowering guidance, they are both describing and creating that very uncertainty.

Or take Piper Sandler's note that “Uncertainty is at an all-time high” and “is historically correlated with bad eco outcomes.” This statement functions not just as analysis but as performative speech—it helps manifest the condition it describes. The more market participants hear about uncertainty, the more uncertain they become.

President Trump seems to understand this dynamic, even as he appears indifferent to its immediate consequences. “Markets are going to go up and they're going to go down but, you know what, we have to rebuild our country,” he remarked when asked about recent market declines. His administration appears willing to tolerate market pain in pursuit of broader political and economic restructuring—a stance that further unsettles investors who had anticipated a “Trump put” that would prioritize market stability.

What makes this situation so fascinating is that we're witnessing the collision of different narrative frameworks in real time. The traditional market narrative—that economic growth leads to corporate profits which lead to higher stock prices—is being challenged by a new political narrative about economic nationalism, deglobalization, and structural change. The tension between these competing stories creates precisely the uncertainty that markets find so unsettling.

We've moved beyond simple economic calculation into the realm of interpretation, psychology, and meaning-making. Investors aren't just computing probabilities; they're trying to make sense of a shifting landscape where the old rules may no longer apply. The animal spirits are restless, sensing a change in the environment before it fully manifests in the data.

This is why traditional economic models so often fail to predict major market movements. They treat economic actors as rational calculators rather than meaning-makers, as processors of information rather than interpreters of narratives. But markets don't simply reflect reality; they construct it through the stories they tell and the beliefs they hold.

The current market correction reveals something profound about human economic behavior: we don't just respond to what is happening; we respond to what we think is about to happen, which in turn shapes what actually happens. This recursive loop between perception and reality, between narrative and outcome, is the space where animal spirits roam.

As you watch the market fluctuations in the coming days, remember that you're not just observing the recalculation of economic probabilities. You're witnessing a collective effort to construct meaning in the face of uncertainty, to create a coherent narrative that can guide action in an increasingly unpredictable world.

You can feel it, can't you? The shift in the story. The change in the air. The animal spirits are on the move, searching for new ground, new narratives, new certainties to replace the old. And in their movement, they reshape the very landscape they traverse.